Preview: RBNZ Rate Decision - Rate Hike Expected

OVERVIEW

The RBNZ is expected to lift interest rates at its Monetary Policy Review on Wednesday with all analysts surveyed unanimous in their expectations for a hike, while OIS had priced in a 100% probability for the OCR to be raised by 25bps to 0.50% but saw that slightly ease to a 96% chance this week after Hamilton, Raglan and several other Waikato towns joined Auckland at level 3 restrictions.

HAWKISH PAUSE AT THE LAST MEETING

As a reminder, the RBNZ opted for a hawkish pause at the last meeting where it defied dwindling expectations for a rate increase, citing the imposition of level 4 restrictions on activity across New Zealand and health uncertainty.

However, the Committee agreed that the least regrets policy stance was to further reduce monetary policy stimulus and members concluded that they could continue removing stimulus following the decision to halt the LSAP in July.

The RBNZ also steepened its rate hike projections at that meeting with the forecast for the OCR raised to 0.59% for December 2021 (prev. 0.25%), 1.38% in September 2022 (prev. 0.49%) and 1.62% in December 2022 (prev. 0.67%).

OFFICIALS HAVE DOUBLED DOWN ON HAWKISH RHETORIC

RBNZ Governor Orr also doubled down on the hawkish rhetoric shortly after that meeting in which he stated that COVID-19 cases alone will not stop a rate hike and that October is a live meeting when asked about the potential for a hike. Furthermore, Assistant Governor Hawkesby also noted that the RBNZ considered raising the OCR by 50bps at the prior meeting and decided to hold rates due to a communications challenge, not economic risks.

EASED ALERT STATUS AND STRONG DATA FAVOURS A HIKE

With the lower COVID-19 alert status in New Zealand where Auckland and some nearby areas are currently at level 3 but the rest of the country is at level 2, there doesn’t seem much impeding the central bank from resuming normalisation and the latest key data also suggests there is some leeway in the economy to tighten policy after Q2 GDP topped estimates with Q/Q growth at 2.8% vs. Exp. 1.3% (Prev. 1.6%, Rev. 1.4%) and Y/Y surged to 17.4% vs. Exp. 16.3% (Prev. 2.4%, Rev. 2.9%). Furthermore, the recent announcement by the RBNZ to proceed with the proposal to tighten loan-to-value ratio restrictions on lending to owner-occupiers to reduce risky mortgage lending also adds to the tightening argument.

ANNOUNCEMENT

The policy announcement is set for 02:00BST/21:00EDT in which the initial focus will be on the actual decision on rates with ING expecting NZD to modestly benefit from a rate increase, while focus will turn to the statement for any clues on the pace of further tightening.

Of note, this week’s announcement will not include a post-meeting press conference which would normally diminish prospects for policy changes, although that doesn’t seem to be the case on this occasion given the red-hot economy and the central bank’s considerably hawkish comments.